Start spreading the news. Stark Enterprises’ foray into the New York market is the most visible in a $600 million series of deals that has the Cleveland-based real estate company poised for explosive growth.
Stark recently paid $98 million for a six-story building at the bustling intersection of Flatbush Avenue and Fulton Street in Brooklyn. It has another $1 billion in the ground and is pushing hard to double its portfolio from $2 billion to $4 billion over the next five years.
“When you do a $100 million purchase in New York, you fall under a lot more scrutiny,” says COO Ezra Stark. “But it exposed us to a lot more deals. People are taking notice of what we’re doing, and that increases the exposure of our firm to other potential investors and deal flow.”
This week, we take a deeper look at Stark Enterprises’ growth strategy and the thoughtful approach the company takes to acquiring new properties.
Knowledge equals opportunity
Stark’s journey to buying the Brooklyn property can be traced back to Ezra’s time spent as a graduate student at New York University and working at Forest City Ratner Cos. in New York.
“Typically, it can be a challenge to learn a new marketplace if you’re approaching it cold,” Ezra says. “That’s why it’s critical to have local partners and boots on the ground. You can’t buy things sight unseen or base an evaluation on paper. You need to understand the contextual relationship the asset has to the rest of the neighborhood.”
Now at this point, you might be thinking, ‘I’m not interested in buying real estate. This story has nothing to do with me.’ Before you swipe left, consider this:
“We don’t look at ourselves as a company that just buys or develops property,” says Nico Bolzan, executive managing director at Stark Capital Group. “We are a true real estate operating company. When we look at a potential acquisition, we consider EBITDA, revenue, expenses, profitability, cash flow and upside — the same statistics you would look at if you were looking to buy a business.”
The company was fortunate to have Ezra’s knowledge of Brooklyn before it made that acquisition. But if he had not been there, the company would have done what was necessary to do its homework and gather the information and perspective it needed before pulling the trigger on the purchase.
“We approach every acquisition from all those different perspectives,” Ezra says. “That’s really been one of our secret sauces. We’re very proactive. We position ourselves to be responsive to opportunities. At the same time, we are seekingopportunities and we once we identify them, we’re in a position to hit the ground running.”
Expertise from every angle
There are two key components to Stark’s growth strategy: vertical integration and a willingness to embrace key strategic partnerships. We’ll start with vertical integration.
Stark owns Arbor Construction, a full-service construction firm; Comet Management, a multifamily leasing and management company; and Emuna Energy, which is focused on environmental sustainability. These are in addition to Stark Capital Group, the capital markets arm, and Exterior Services, which does landscape design.
This allows the company to provide all these services directly to its assets. And from an acquisition perspective, it is a critical tool that can be used in the decision-making process.
“When we’re evaluating an asset for acquisition or development, we sit around the table and with all of our teams,” Ezra says. “You have somebody from development, somebody from finance, somebody from legal, architecture, landscaping. Each of these departments brings its unique perspective to the discussion.”
When you’re committing large sums of money to make an acquisition — whether it’s a building or a business — that ability to understand all the details from a variety of viewpoints can make a huge difference. A prime example of the value of this process is that it forces you to consider the downside scenarios.
“When we enter into any acquisition, we say, ‘What’s our Armageddon? How do we protect the principal investment so that in a worst-case scenario, we don’t lose money,’” Ezra says. “I’ve seen a lot of people who think, ‘Well, it’s been growing at this rate for the past couple years, it’s going to continue to do so.’ As we know, everything is cyclical.”
A team of experts that cover all the bases minimizes the risk of missing something that could lead to headaches down the road.
A shift in approach
Partnerships are another piece of the puzzle at Stark. Historically, the company did not typically raise outside capital or rely on equity partners to complete acquisitions, Bolzan says. That changed when Stark decided to expand geographically and buy more income-producing assets.
“We already had the knowledge and the infrastructure,” he explains. “We had the base to do everything and we really wanted to grow the business. The only thing that was stopping us was the capital. So to bring in outside equity partners with us to buy acquire, develop and redevelop these properties, it allows us the ability to grow.”
At one time, Stark was 100 percent a development company. It has shifted to 65 percent development and 35 percent acquisition and if all goes according to plan, Bolzan hopes it will soon be a 50-50 split.
“We’ve acquired $600 million worth of deals in the last 24 months,” he says. “Our goal is to double our portfolio in the next five years. We have a lot of different partners and assets from Los Angeles to Cleveland to New York.”
For the Brooklyn purchase, Stark partnered with Sun Equity, located in the heart of New York City.
“We have the ability to bring in outside partners, which helps us with the capital necessary to close the deals,” Bolzan says. “We also bring in local partners who are in that market to partner with us so we can have a competitive advantage. Stark Enterprises is never going to be successful entering these markets if we don’t have the local knowledge in that specific market.”
The building in Brooklyn is a mixed-use, fully leased property. The primary tenant, Consolidated Edison Inc. of New York, occupies 238,000 out of 258,000 total square feet. Other tenants are CVS Pharmacy, JP Morgan Chase and United HealthCare Services.
“This move is our first of several planned acquisitions in New York,” Ezra says. “It’s consistent with our strategy of acquiring assets that allow us to unlock hidden value in urban locations that have long-term opportunistic upsides.”
He says Ohio has been a valuable proving ground for Stark’s foray into the Big Apple.
“The cap rate’s valuation of properties is pretty flat in Ohio compared to New York,” Ezra says. “I would argue that to create a multi-billion-dollar portfolio in the Midwest is a much more challenging endeavor than in New York. Yes, New York has many sophisticated players, but the fact is if you can succeed in the Midwest, it actually sharpens the skill set and enables you to have that sophistication to be able to compete in the New York marketplace.”
How to reach: Stark Enterprises, www.starkenterprises.com